School enrollment, the increase in gasoline due to the war, the adjustment of public service rates, an unexpected increase in meat… All of this was mentioned by Javier Milei, Toto Caputo and the main officials of the economic team when explaining the ugly 3.4% that the March CPI registered.
But these arguments escape the factor that libertarians historically pointed out as the true and only cause of inflation: excess monetary emission. And that is why, at this moment, the debate among economists returned to its roots: Was there a “machine effect” What generated the current inflation or should everything be attributed, as Caputo says, to the fall in demand for pesos generated by the “kuka risk”?
It is not an easy debate, because it involves agreeing on what is the relevant definition of “money”. Thus, what the government usually considers, which is the private transactional M2 -includes currency, checks, and demand deposits- It barely rose 20.4% in one year and fell 0.5% in March, according to the latest monetary report from the Central Bank.
Instead, if the M3 aggregate is taken into consideration -adds, in addition to the means of payment, all the deposits of the financial system, such as fixed terms-, then the numbers begin to look more like those indicated by the CPI: The amount of money rose 32.1% year-on-year, while 12-month accumulated inflation was 32.6%. In the first quarter of the year, M3 rose nominally by 3.1%, compared to an accumulated CPI of 9.4%.
The discussion regarding what the relevant number is seems endless and is very technical in nature. Basically, those who prioritize transactional money affirm that the pesos that are immobilized by the BCRA’s reserve requirements or the absorption via Treasury bonds.
And Caputo has proven to be careful about not leaving “loose” pesos in the market: in the latest Treasury tenders he was not content with “rolling up” debt maturities, but also placed more bonds to absorb currency. Thus, with an issuance of bills for $3 billion, it neutralized the expansive effect that the BCRA’s relaxation with the reserve requirements regulations had..
Isn’t the inflation plan stained?
In any case, if Milei made anything clear, it is his vehement refusal to resign himself to high inflation to help the economy grow more vigorously. In fact, its doctrinal position is that these two variables are not compatible.
“If generating inflation generated growth, Argentina would have to be a world power,” was the president’s expressive definition in the talk he gave before an audience of American businessmen, just the day the March CPI was released.
That is to say, in an economy with rising prices there were greater probabilities of maintaining jobs.e work and that, on the contrary, in situations of stability the risk grew that the adjustments would occur not in the level of salaries but in the number of people employed.
Although Milei defends this theory, whose validity was refuted by Milton Friedman -one of the idols of the Argentine president- the truth is that even in the United States there have been demonstrations of its validity at the political level. So much so that even economists who have been or are currently government consultants recommend moving slowly with the fall in inflation, so as not to run the risk of a recession and having to resort to very high interest rates.
The fear of the “B side” of buying dollars
Caputo’s diagnosis was clear regarding what was happening in the economy: there had been an abrupt drop in the demand for pesos in the months prior to the legislative election, as a consequence of the “political attack” and the “destabilization attempts” promoted by the opposition by approving laws in Congress that put the fiscal balance at risk. The proof that the government uses is the massive dollarization adopted by savers during those months, which reached the record level of half of the monetary base.
However, the inflationary impulse continued strong despite the large electoral victory of the government. And the country risk index – which in the government’s perspectives should have fallen to around 400 – rebounded to exceed 630 points at the end of March.
It was at that point that some warnings arose as to whether it could be the Central Bank itself, by embarking on a massive purchase of dollars, that was putting pressure on inflation. The US$5.5 billion accumulated by Santiago Bausili So far this year they have as a counterpart an injection of $8 billion into the economy.
The one who expressed this fear most explicitly was President Milei himself, who in a meeting with Wall Street investors was optimistic about the flow of foreign currency that would enter the Argentine economy, both through exports and investments. On that occasion he predicted to Bausili that “dollars were going to come out of his ears,” and immediately warned him to be extremely careful that this purchase of foreign currency “does not go to the prices.”
It was not the first time that Milei had hinted at that fear. In fact, when until International Monetary Fund demanded that he accumulate reserves, the president had said that he was not going to sacrifice his objective of lowering inflation nor was it going to promote a devaluation jump to meet the objective of purchasing reserves.
Interest rate warnings
But, eventually, that fear was also dispelled. Milei himself explained that the key was that the demand for pesos was recovering and that, therefore, when the BCRA bought dollars, it was because the market took those pesos for transactions.
The proof, from that point of view, was that the exchange rate not only did not rise but was falling. And, furthermore, interest rates were compressed, so the criticism that exchange rate stability was only sustained thanks to the “carry trade” was also unacceptable.
It was a disputed point, because several orthodox economists accused the BCRA of going too slowly in its purchase of dollars. Among them, the influential Sunday Cavallowho said that there was no need to fear an inflationary or devaluation jump. But he issued a warning: those dollars They should not end in the payment of Treasury debts nor of the provincial governments – which, in fact, is what is happening now.
“In order for the only monetary issue to be the one intended to accumulate reserves in the Central Bank, it is necessary that the interest and capital maturities of the debt in pesos also be financed with primary fiscal surplus or with new debt, but never with monetary issue from the Central Bank,” Cavallo maintains.
But he warns that it is not enough to accumulate reserves, but that we must avoid doing it “Sturzenegger style.” He affirms that the experience of the Macrista administration is that taking advantage of the inflow of short-term capital and manipulating the interest rate to keep the dollar anesthetized leads to an exchange crisis. Therefore, it suggests that, in addition to eliminating the residual exchange rate, The Treasury and provincial governments should be prohibited from borrowing at a fixed rate.
“They can only do it in pesos adjusted for inflation or by exchange rate and for terms longer than six months,” he proposes, as a way to prevent the cyclical return of the financial cycle.
In the end, was there a machine?
The criticism does not end there, because there are also economists who affirm that the government, contrary to its own discourse, resorted to the “casting machine” and then he wanted to hide the effect of his bad decision by blaming the “kuka risk.”
The origin of these criticisms lies in the agreement reached with the IMF a year ago. At that time, taking advantage of the assistance with “fresh dollars”, an old debt that the Treasury maintained with the Central Bank was canceled, and which appeared as a “non-transferable bill” for US$14,000 million.
Pablo Quirnocurrent chancellor -and then Secretary of Finance-, announced that in this way, an end was put to “a paganism used by Kirchnerist governments to appropriate the BCRA reserves.”
However, when the most orthodox part of the market expected the operation to end there, there was a measure that raised controversy: The BCRA transferred profits to the Treasury for $11.7 trillion – equivalent to about US$10,000 million, according to the exchange rate at that time. The official argument was that the BCRA had cleaned up its balance sheet thanks to the elimination of liabilities and the appreciation of bonds under its belt.
Thanks to that situation, he explained at that time Federico Furiase – today Secretary of Finance – the Treasury would be helped to settle debt maturities. And, since the remainder would be deposited in the account that the Treasury has in the BCRA, the monetary effect would be neutral.
A year later, criticism reappeared that this measure was a hidden use of the “little machine.” For example, the consultant Christian Butler argues that the inflationary acceleration that occurred in the second half of last year “It is the mathematical cost of trying to absorb that surplus.”
This expansion involved a 26% jump in the broad monetary base -which also includes public debt securities-, which leads critics to affirm that “yesterday’s issuance is today’s inflation.”
An alarm on the fiscal level
Finally, there is another factor that is also the subject of a technical but relevant debate: whether the government correctly accounts for the financial cost of interest that generate capitalizable letters. The accusation of critics is that, if another measurement methodology were applied, the financial surplus would quickly transform into a deficit.
As if this controversy were not enough, in addition, there is an alarm raised by the fact that they are going eight consecutive months of real year-on-year decline in ARCA collection. This makes the government depend more on the “chainsaw” to sustain the fiscal surplus, which shows a tendency to lose weight every month.
In fact, the latest report of the Congressional Budget Officewhich monthly reports the accounts of the central administration on an “accrual basis” and not a “cash basis” – that is, on expenses incurred but not necessarily already paid -, already reported that in March the primary deficit was returned.
